T 2 Flashcards
primary market
Firm wants to raise capital
Create new securities and sell them
The firm receives proceeds from the sale
secondary market
Current owner sells to another party (i.e. re-trade of current securities)
No new capital is raised for the firm
No change in the number of securities
Public Offerings:
Initial Public Offerings (IPO): First sale of stock by a formerly private company (IPO is usually considered underpriced )
Seasoned equity Offerings (SEO): Offered by companies which already have stock trading in the market.
Private Placement
Sold directly to a small group of investors
Not registered with SEC
Restriction of resale in the secondary market
IPO investment bank ( firm commitment )
In firm commitment, the underwriter buys all the securities and resell to the public.
The underwriter bears the inventory risk.
The underwriter’s profit is based on how many shares it sells
IPO investment bank best offer
In best-effort, an underwriter commits to make their best effort to sell as much as possible of a securities offering.
no guarantee of raising a specified amount of money
limits underwriters profit
types of secondary markets
Direct Search Markets
Brokered Markets
Dealer Markets
Auction Markets
direct search market
Buyers and sellers locate one another on their own
brokered markets
Third-party assistance in locating buyers or sellers (
dealer markets
Third-party acts as an intermediate buyer/seller and profits from the bid-ask spread.
Most bonds and foreign exchanges; NASDAQ
trading mechanics
types of orders :
market order
price contingent order : ( limit order/stop order)
market order
Buy or sell order at the best price currently available.
complications:
1. Large market orders can be executed at multiple prices
2.The order may be executed at a different price from the one at the moment of the order
limit buy order
limit buy order buy if price less or equal to stipulated price
execute at a particular price or lower
limit sell order
can be executed at limit price or higher
stop loss order
order at $40. If the trades take place at $40 or less, the order is activated and the order become a market sell order.
stop buy order
order at $50 becomes a market buy order if trades takes place at $50 or above
brokers options to execute order
internalization third market maker electronic communication exchange centralized exchange ( dealers market, auction market, regional market)
electronic communication networks
Computer networks that allow direct trading
without relying on market makers
Limit order book available to all participants
NYSE commission brokers
Take orders placed by the public at the brokerage firm and execute them on the exchange
NYSE floor broker
: Aid commission brokers when the order flows becomes too large for a commission broker to handle
NYSE spesialist
Market maker in NYSE that specializes in facilitating trades of specific stocks and maintains “fair and orderly market”
Each stock is assigned to one specialist. A specialist makes market for many firms
Maintains the limit order book and act as auctioneer to show brokers best bids and offers
Keep and inventory of stocks and buy/sell if there is an supply-demand imbalance
Largely replaced by ECNs
NASDAQ
No specialist; multiple market makers communicate with buyers and sellers
Three level of members
LEVEL 3:Registered market makers
Set bid and ask quotes and stand ready to or sell
LEVEL 2:Brokers
Receive bid and ask quotes, but cannot enter quotes
LEVEL 1:Investors
Receive only inside quotes, but not quantity offered. Not actively buying/selling but need information on prices.
Trading Cost Components
EXPLICIT COSTS
Direct costs if trading that are associated with visible accounting charges
Commissions paid to brokers, fees paid to exchanges, taxes paid to governments.
Any other resources devoted to the trading process.
Trading Cost Components
IMPLICIT COSTS
Bid-ask spreads
Price Impact
Missed trade opportunity costs
buying on a margin
Purchasing securities (in part) by borrowing money is called buying on margin. Margin is the portion put up by an investor to secure credit from a broker to buy securities. In other words, it refers to the part not borrowed. The remainder is borrowed from the broker.
short sale mechanics
Taking a long position with or without margin : Buy low now, sell high later
Short selling: Sell high NOW, buy low LATER
Short sales allow investors to profit from a decline in security’s price by selling a security that is borrowed from another investor
show selling pros and cons
Pros: Possibility of high profits Little initial capital required Hedge against other holdings Cons: Potentially unlimited loses Margin account necessary and interest incurred Short squeeze
